In thinking of newbie budgeteers, I wanted to put together a quick list of things I thought would be essential for any new budgeteer.

5 Best Budgeting Tips

1. Know Your Why

I call this your Financial Focus Point. Budgeting is a lot easier when you’ve already got the motivation. For some, the motivation might be to pay off debt faster. Others might be needing to save up money for a new car. You might want to be able to start saving for retirement. Others might budget to be able to give more.

2. Record Expenses Immediately

In the book The Power of Habit, Charles Duhigg talks about the importance of a trigger in forming a habit. The trigger for budgeting is any time you reach for your wallet or purse you know you need to record the expense.

After nearly a decade of budgeting, my wife and I stopped budgeting for a couple of years. We started back up again when we downloaded the Toshl App on our phones. Each time we spend money, the very next thing we do is record the expense. It takes less than 30 seconds.

3. Review the Numbers Monthly – as a Couple

If you’re overspending in a category, it’s absolutely vital that you’re both aware of the problem. In far too many families, one person keeps the budget and the other spends the money. What a terrible idea. Get together and see where the money is going. This will help you develop a plan for adjusting your spending as necessary.

4. Keep it Simple, Saint

No, I don’t want to call anyone Stupid today.

Most people fail at budgeting because they make it too complicated. What am I supposed to do when I buy a gum ball for 5 cents? What should I do if my purchase has money that comes out of multiple categories? Who really wants to use a calculator to divide a Walmart purchase into 5 separate categories?

Suggestions for keeping it simple:

Have a miscellaneous line item on your budget. If you don’t know where the funds go, just add it to that line.

Budget $10-$15 a month on small expenses. If we spend less than a dollar, we don’t record it. We know the $10-15 amount will cover it.

If you really want to keep categories firm within your budget, it may be easier to divide your purchase into separate transactions rather than calculating the different purchases from your receipt. (Yes, check out 5 times.)

5. Use the Envelope System

I think the most effective budgeting method (with the least amount of paperwork) is the envelope system. First, this is helpful because it forces you to use cash instead of a credit card or debit card. That automatically reduces the paperwork. Secondly, it forces you to stay within your budget because when the money is gone, you must stop spending.

I think most family financial issues can be traced to the use of credit cards. Start using cash, and I think you’ll be amazed at the results.

What are your budgeting tips? If you had to teach a budgeting class, what would you be sure to emphasize?

Comments

Craig,
Though it may not strictly be a budgeting matter, I would still teach about margin in the budget. That is, we should not spend every penny we make. We need to leave room for the unexpected and emergencies. There is a margin we could call “permanent margin” which would be leaving a certain set amount in your checking account to make sure you don’t overdraw the account. If we make this $1000, then you won’t have to be concerned about any single purchase taking you below $0. It’s like another little savings account. Also, some banks will waive checking account fees if you keep a minimum balance, which can also save money. I wrote about this in blog post you published last summer.

Roger,
What a great addition to the list. I do think financial margin is such an important component of a healthy financial plan. I’ll be sure to include a discussion on margin when we cover the topic this weekend.

It looks good. I agree with your points. I have found (largely to the influence of my dad, although I really didn’t see it in my youth) that the tracking of actual expenditures is much more important than the mere making of a plan (budget). I would say tracking actuals is ten times as important as making a plan.

By the way, Craig, thanks for your comments on the need for more “contra-punctals” in my writing. I am moving toward that. Also the new version of wisdomwithwealth.org is now up and running. I would welcome your review/comments.

Tom,
I’d agree that the tracking portion is significantly more important than the planning portion. It’s like setting a targeted number of daily calories, but never tracking your calorie intake. I doubt it will do much good.

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